Disclaimer : This blog post is a personal investment opinion triggered when I texted my Dad, “Baba, SnowFlake IPO seems like a great long term investment” and he replied “Why?”. I am SnowPro Core Certified and have hands on experience in implementing & data migration to SnowFlake. As on 29/08/2020, I am not employed by SnowFlake & do not have any direct financial transaction with SnowFlake. This is not investment advise. Please do your own research before investing in Financial Markets.I am also analyzing competing IPOs of Sumo Logic, JFrog & Unity
I was born in 1988 and have been investing since 2008. When you are into technology & investing, I believe you have a good exciting feeling when a tech IPO goes live. I never had experienced that feeling. But with upcoming Snowflake IPO, I am feeling something good about the long-term returns opportunity. Here’s my reasons why to invest in Snowflake’s IPO based on their S-1 filling.
1. Snowflake’s Product – Unique Market Fit
Simply put, Snowflake is a data warehouse software-as-a-service on the public cloud. It uses existing public cloud providers – AWS , Azure & Google Cloud without requiring the enterprise customer to spend efforts on setting up guard rails and/or configuring the product. Using simple SQL commands & easy integrations with 3rd parties , they can start their day one with this enterprise-ready data warehouse by transferring data from their legacy/on-premise systems to the cloud.
There are no limitations of actual server size or storage and enterprise do not have to purchase large server size commitments. Snowflake manages scale up or down data warehouse server size automatically based on query needs. That enables data transformation ETL jobs and queries to run concurrently. Analyst do not have to wait for the ETL jobs to finish before running their queries. Director of Data Analytics at Rauken Rewards adds that “we’ve definitely seen instances where Snowflake produces a 95% faster run time compared to our previous data warehouse“.
Snowflake’s Product Business Advantages
- Faster Time to Value : Less time & effort investments required to configure product , onboard resources & train people to use the product
- Auto Scale Up or Down : No need to make large data server size purchase commitments as Snowflake charges customers by use & scales resources automatically
- Power Up Real Time Use Cases : Snowflake’s compute power should support & scale real time use cases such as customer data platforms to deliver connected experiences based on 360 degree view of customer
- Get Multi-Cloud Ready : Cloud computing would soon represent utilities for digital enterprises. Snowflakes helps IT leadership get ready for global, dynamic, multi-cloud architectures
2. Snowflake’s Pricing Model – Cost Savings Oriented
Important call out that Snowflake is NOT subscription based like other SaaS products in the market. Snowflake is bringing actual elasticity to enterprises by separating compute ,storage & cloud services. Enterprises are charged by their usage of ‘elasticity’ i.e. computer , storage & cloud services. To get volume discounts, customers can purchase large capacity commitments or opt for the usual pay on demand.
To elaborate here’s an example about an enterprise customer loading data 24×7 and to be used by 17 users 5 days a week. Notice how the cost is broken down by elasticity & actual usage of resources.
Snowflake’s Pricing Model Business Advantages
- Zero Cost of Data Backups : During ELT or similar data transformation exercise data backups are created to prevent complete loss of data. Such activities incur costs on existing public data clouds. On Snowflake there no costs for data backups as long as the backup data is not changed.
- Pay for Actual Usage : Enterprises should explore that they are paying for actual usage of the services and not as a subscription services
- Cyclical Cost Savings : Data demand and generation follow industry seasonality & cycles. For example, more data would be generated that would require storage and compute when customer transactions are higher during winter holidays. Enterprises can save costs when customer transactions are low rest of the year
3. Snowflake’s Customer Acquisition – Frictionless & Scalable
They haven’t called this out in the S-1 but based on my experience Snowflake’s customer acquisition is fast , frictionless and requires minimal human intervention. As a novice customer I can browse to Snowflake’s website , create a trial account in less than 2 minutes and start onboarding my data. If I am happy with my experience, I will go ahead to purchase additional credits for storage and compute. Additionally, I can attend a free instructor-led lab where I can ask questions to optimize my query processes.
Also not mentioned in S-1 is another method customer acquisition – Data Share. If you have a data agreement or partnership with another enterprise (second party), Snowflake can quickly share your data & updates with the enterprise. The second party would get a Snowflake instance created which would make a copy of data share available. Such product strategy would help Snowflake reach more enterprise customers with zero marketing/sales investments.
Snowflake’s Customer Acquisition Investor Advantages
- Higher Revenue per Customer : Due to a frictionless sales environment, Snowflake enjoys roughly ~$160K average revenue per customer – which is extremely high for a Public SaaS company. As consumers adopt digital organically, the number of enterprise customers needing Snowflake resources would grow accordingly.
- Organic Customer Retention & ACV Growth : Customer retention is the new growth in today economy impacted by black swan events. According to S-1 documents filled Snowflake is growing at 121% YoY where more than half of the revenue is gained from existing customers. These customers seem delighted with their investments and planning to invest more in the upcoming quarters of recovering economy.
- Exponential Increase in Revenue During Winter Holidays : Snowflake estimates $ 688.2 Mn contracted future revenue in the last six months ending July 31st 2020. This future revenue represents enterprise customer data needs purchased at bulk discounts but yet to be recognized. I believe customers have realized that data warehousing needs would move in sync with customer transactions, which usually increase during winter holidays. By the end of this financial year, I predict that Snowflake would be able to recognize most of this revenue and more. As a result Q3 & Q4 would always see higher revenue growth than remaining financial quarters
4. Snowflake’s Competition Landscape – Accelerated Tailwinds
Cloud adoption i.e. more transformation from on-premises to cloud data warehouses, is the biggest tailwind in Snowflake’s favour. The S-1 states that – According to IDC 49% of data will be stored in public cloud environments by 2025, an increase from approximately 30% today. Adding to this tailwind is the explosion of data generated that require to be migrated to cloud and/or requires transformation to develop actionable insights. Snowflake also quoted another IDC prediction that 175 zettabytes of data would be generated by 2025, representing a CAGR of 27% from 33 zetabytes of data in 2018
Snowflake’s Competition Landscape Investor Advantage
- Continued Top-line Growth : Even though COVID19 has accelerated digital transformation & cloud adoption at enterprises, there are still many more growth opportunities available worldwide
- Cloud Optimizations Increase Gross Margin : Recent data has shown that enterprises are getting better at managing costs & optimizing resources using cloud computing. Snowflake, using these public clouds would continuously use these optimizing techniques to increase their gross margins overtime. Also as it acquires more customers, the network effect would scale their cloud computing usage and drive gross margins even forward. Here’s a look at gross margins today among SaaS cloud providers.
- Infinite Destinations to Activate Insights : Use cases for actionable insights are infinite as Snowflake supports sending data to various endpoints depending on the use case. For example for driving connected experiences for customers, Snowflake enables integration with Adobe Campaign. For enterprise wide visualization use case it has existing connectors with Tableau, sigma and more
